Skechers laces up profit while trying on a new apparel line

Trendy footwear maker Skechers USA Inc., trying to overcome the controversy from its toner shoes, is increasing its modest gains from last year and so far outrunning Wall Street's expectations this year.

The Manhattan Beach company has posted profits in the last two quarters that exceed last year's total earnings. Its second-quarter net income of 14 cents a share blew past analysts' expectations of 3 cents, on average.

Robert Greenberg and his son, Michael, co-founded Skechers in 1992 after the elder Greenberg built L.A. Gear into the world's third-largest footwear giant with $1 billion in sales in 1990 before it slumped and he was pushed out.

In the hip teenager lingo of the time, a skecher was someone who was antsy and couldn't sit still. Skechers' combat boots with tractor soles, steel toes and large heels were a teen favorite.

The company, which hit $100 million in sales in 1995, went public in 1999 after twice shelving plans for an initial public offering in the late 1990s.

With nearly 2,500 employees, Skechers has been able to maintain its popularity in the U.S. while expanding overseas, recording worldwide sales of nearly $1.6 billion last year.

"The increase in domestic and international sales indicates the strong acceptance of our products worldwide," said David Weinberg, the company's operating and finance chief.

The latest

Skechers is cautiously rolling out a new apparel line.

The company has joined with Li & Fung in Hong Kong, a global supply-chain management company, to design and manufacture the garments.

Skechers has started selling clothes in only a few locations, including the Skechers store at the Third Street Promenade in Santa Monica, as a test.

"We are still working on the line," Weinberg said. "We're not in a rush to do it. That one we are playing very close to the vest before we really push it out onto a broad spectrum."

Accomplishments

International sales were never big because the company lacked distributors, Weinberg said. That has changed.

"We have a new subsidiary in Japan. We have a joint venture in China," Weinberg said. "We have a relatively new subsidiary that we just restructured in Brazil, all places that have significant potential."

Overall sales jumped 11.5% to $428.2 million in the most recent quarter compared with a year earlier. The results reflected strong domestic and international sales.

The improved foreign distribution network enabled Skechers to tap burgeoning international demand. The company hopes to boost foreign sales so they account for half its revenue, from about a third today.

"A lot of countries are starting to ignite in sales, predominantly in Southeast Asia," Weinberg said.

"In the past, we didn't have the infrastructure for international sales," Weinberg added. "Now we have a much bigger structure to sell through. Our products are in demand all over the world."

Challenges

In pushing into the apparel market, Skechers runs more squarely into competitors such as Nike Inc. and Adidas. Nike, for instance, has about 15 times the sales of Skechers, analysts said.

Skechers also is trying to put an end to a two-year controversy over its so-called toning shoes, which had rocker-bottom soles. They were marketed as shoes that would help customers lose weight and strengthen and tone their buttocks, legs and abdominal muscles.

Hall of Fame quarterback Joe Montana and celebrity Kim Kardashian boasted in ads about how the Shape-Up shoes helped them. Skechers was the leader in a market estimated at $1.1 billion at its peak in 2010.

But the Federal Trade Commission said the advertising was based on unfounded claims. Skechers agreed to pay $40 million to settle the allegations, plus $5 million more to settle state accusations and $5 million for attorney fees.

Last month, the FTC said that 509,175 checks were sent to customers who had bought Skechers' toning shoes.

Still, the company faces pending negligence and product liability lawsuits by hundreds of customers who alleged they were injured by using the toning shoes.

Analyst views

Of the seven analysts who cover the company, four have buy or strong buy recommendations on the stock. Three recommend holding it.

Zacks Investment Research upgraded Skechers last month to a strong buy based on the company's second-quarter results.

"With more emphasis on the new line of products, cost containment efforts, inventory management and global distribution platform, the company anticipates sustaining the growth momentum in 2013," the Zacks report said.